Depressed dollar moves into the soft league

THE downward pressure on the dollar is unlikely to abate this week as it takes up its unfamiliar status as a soft currency from which investors flee in times of uncertainty.

Last week was one of the worst in recent history for the currency as it tumbled 11 per cent against the mark and 8 per cent against the yen. Although the pressure lifted slightly on Friday after some better-than- expected unemployment figures for February, few believe the bloodletting has finished.

The currency steadied at around DM1.41 by the end of the week, but some analysts expect it to fall to around DM1.35 in the next few days.

Experts found a litany of reasons for the dollar's troubles. The favourite culprit was Alan Greenspan, the Federal Reserve chairman, who hinted to a congressional committee two weeks ago that US interest rates had probably peaked. This cheered Wall Street but depressed dollar investors, for whom flat or falling rates are never appealing.

Meanwhile, not everything about the US economy is so encouraging when its trade and budget deficits are brought into the equation. Fears that Washington is not serious about closing the budget gap were suddenly reawakened by Congress's failure at the start of the month to pass the Republican- sponsored balanced-budget amendment. Big trade and budget deficits imply continuing dependence on foreign capital - a nasty disease that Mexico knows all about.

Mexico itself may have been weighing the dollar down. In spite of its presentation of a fearsome-looking emergency economic plan last week, some worry that the country's slide into chaos may be irreversible, with damaging consequences for the US and all its Latin neighbours.

Then, of course, there is the mark, to which many dollar investors have been defecting. The view that Germany will shortly hold the world's pre- eminent reserve currency in place of the buck is not shared by all, however. Robert White, senior vice-president at Standard Chartered in New York, was dismissive. "Those arguments are just nonsensical," he said. "No other market is large enough to hold the kind of reserves that are held in the US."

But a devalued dollar should translate into improved exports for US manufacturers, while worries that the higher cost of imports risks stoking inflation may be exaggerated. Roughly 90 per cent of US consumption is sourced domestically and much of the remainder comes from countries against whose currencies the dollar has stayed steady, including Canada.

Whether this winter will be remembered for a dollar dip or a dollar disaster will depend on how the greenback behaves now. The jobless data - showing a February unemployment rate of 5.4 per cent, down from 5.7 per cent in January - buoyed the currency because, by indicating a still-motoring economy, it provided the Fed with an excuse for raising rates again if it wants to, perhaps even at the end of this month.

David Hale, of Kemper Financial in Chicago, believes the worst is over. "I think the dollar issue has been resolved in the short term," he said. "It eliminates any suggestion of the Fed easing and starts discussion about it tightening. It's a very healthy development." He is also cautiously hopeful about Mexico's future.

But at Standard Chartered, Mr White is less sure. "The idea that this is going to turn around suddenly and that everything will get better is just not the case," he warned.

He has one other fear: that there may be other banks ready to follow Barings into penury, if not because of rogue traders then because of what the dollar's fall has done to their derivatives exposure.

Noting that rumours had swept Wall Street late last week of the imminent collapse even of the venerable JP Morgan, Mr White concluded: "You have got to worry about the whole fabric of the financial market coming apart. It could be catastrophic and have global implications."